The CARES Act – The Practical Impacts on You, Your Business and Your Customers

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By Vince Donohue

There is good news for Americans struggling financially as a result of COVID-19 now that Congress has passed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The Act, passed Friday, is the third phase of Congress’s effort to provide health and financial relief to Americans and the country’s health care system.

In Phase 1, Congress provided “funding for medical supplies and accelerated vaccine development; in  “Phase 2” Congress provided funding free virus testing, expanded Family Medical Leave Act protections and imposed paid-leave requirements for employers.

In this third phase, Congress provided the most sweeping economic relief initiative in its history to aid individuals and businesses affected by this crisis. The Act will flood the economy with needed capital and liquidity – in the form of  direct cash payments to families, loans and tax credits for businesses, expanded protections for workers and supplements to unemployment benefits traditionally provided by the States.

The CARES Act fills 880 pages.  This post summarizes its effects on businesses, their owners and individuals who consume their goods and services.

For Individuals:

Recovery Rebate.  The Act authorizes payment (in the form of checks or direct deposit estimated to arrive between 3 weeks and 2 months) of $1,200 to each adult ($2,400 for joint filers) plus $500 for each child.  This benefit is phased out beginning at $75,000 of adjusted gross income (“AGI”) and is completely phased out at $99,000 (amounts double for joint filers).

The rebate is “refundable”, which means the amount of the payment is not reduced for taxpayers who pay little or no tax. Better, the amount you receive will be excluded from 2020 income. What do you need to do to collect it?  Simply check your mail, or your bank account, if you have had IRS checks directly deposited before.

If your income qualifies you for the rebate (determined based upon your latest filed Federal return 2019 or 2018), the IRS will just mail or deposit rebates to eligible recipients.

Expanded Unemployment Benefits.  The Act provides a massive expansion of unemployment benefits to displaced workers.  First, the Act provides a federal benefit of $600 per week for up to four months in addition to what your individual state pays.  For workers in Pennsylvania, the federal benefit is double the maximum $572 benefit per week the Commonwealth allows .

In addition, the Act extends the maximum period of unemployment benefit coverage under state law (26 weeks in PA) for an additional 13 weeks.  Importantly, this federal benefit is available to workers typically excluded from coverage:  those who are self-employed, independent contractors and those with limited recent work history.

For Businesses

Paycheck Protection Program.  The Act makes $350 billion in 100% federally guaranteed Section 7A SBA loans available to small businesses to cover the most critical operating expenses like payroll (including paid sick leave and benefits) for employees making no more than $100,000 per year, rent, utilities, insurance premiums and interest on mortgages and other business debt incurred prior to February 15, 2020.

The maximum loan amount is $10 million, subject to further limitations based upon the business’s historic payroll costs. There are surprisingly few eligibility criteria for these loans.  To qualify, a business must:  have fewer than 500 employees; have been operational on February 15, 2020; and have had employees for whom it paid salaries and payroll taxes.

In addition, a prospective borrower will be required to submit a good faith certification that the loan is needed to continue operations during this crisis, that proceeds will be used for the purposes listed above, and that the applicant has not already received amounts under this program.

The final version of the legislation jettisoned the requirement that an applicant have no other alternatives for financing.  The loan terms are very attractive:  the interest rate cannot exceed 4%, and many sizable fees typical for SBA loans are waived; moreover, personal guarantees, collateral and prepayment penalties are prohibited.  Perhaps the most attractive features of these loans are the payment deferral and principal forgiveness provisions.

Principal loan balances will be forgiven to the extent that loan proceeds were used for payroll, mortgage interest, rent and utilities during the eight-week period following origination of the loan.

Because a primary goal of this loan program is to encourage employee retention, the forgiveness benefit is further limited based upon cuts in employee head counts or reductions in wages compared to the same period in 2019.  To apply for these loans, applicants can contact any bank that is certified to make SBA 7A loans.

Congress has moved with unprecedented speed to mitigate the short- and long-term effects of COVID-19 on our economy.  Never has there been easier access to enormous amounts of federal assistance for businesses.  The program has been structured in a manner to benefit not only those businesses, but the individuals they employ and the customers they serve.

We at Lamb McErlane stand ready to help guide you and your business through this crisis.  If you have further questions about these programs, or if you would like a list of area SBA lenders, please contact Vince Donohue at vdonohue@lambmcerlane.com. 610-701-4429.

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Vince Donohue serves as partner and chairman of Lamb McErlane’s Business & Real Estate Group and is a member of Executive Committee. He has advised clients on all matters related to business and real estate, including business formation, equity structuring and recapitalization, owner relationships, debt and equity investments, taxation, employment issues, leases and related financing arrangements, real estate transactions and dispute resolutions involving all of the foregoing.

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